Pareto Efficiency vs. the Ad Hoc Standard Monetary Objective An Analysis of Inflation Targeting

The standard ad hoc monetary objective function creates a bias in favor of inflation targeting. Instead, this paper uses the Pareto criterion to assess inflation targeting (IT), price-level targeting (PLT), and nominal-income targeting (NIT). The effect that unanticipated inflation or deflation benefits one party to a nominal contract while hurting the other party is an effect that cannot be captured in a model with a representative consumer or identical consumers. To capture this effect, this paper analyses models with diverse consumers in a pure-exchange economy without storage. When nominal aggregate demand (NAD) is stochastic but real aggregate supply (RAS) is not, PLT Pareto dominates IT. This is because IT perpetuates price errors and hence nominal aggregate demand errors, while PLT tries to return to the original targeted price path. By perpetuating these errors, IT perpetuates the welfare losses, whereas PLT corrects so to help reduce these welfare losses in the future. When RAS is also stochastic, nominal contracts under NIT can lead to Pareto efficiency when consumers have average relative risk aversion, non-stochastic endowment-to-RAS ratios, and no utility shocks. Under the same assumptions IT and PLT lead to Pareto inefficiencies because they force the payers of nominal contracts to guarantee the real value of those payments to the receivers. In essence this transfers RAS risk from the receivers of the nominal obligations to payers of the nominal obligations. However, this transfer of risk would only be appropriate if all payers of nominal obligations had below average relative risk aversion and all receivers had above average relative risk aversion, a situation that rarely will hold.Pareto efficiency, inflation targeting, price-level targeting, nominal-income targeting, monetary objective function

Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities

Pareto-efficient consumption in a pure-exchange, one good economy varies over states of nature with respect to only two factors: real aggregate supply and individual utility shocks. One’s optimal contract receipts vary with respect to only these two factors and the ratio of one’s endowment to real aggregate supply. How one’s Pareto-efficient consumption varies with real aggregate supply depends solely on how one’s relative risk aversion compares to the average. Complete markets can be approximately achieved by four contracts dealing with these factors. This has implications concerning central banking, efficient insurance contract design, and a possible new financial innovation.complete markets, inflation indexing, nominal-income targeting, inflation targeting, price-level targeting, monetary policy

The Indexing Paradox -- Be Thankful for Irrational Investors

This paper introduces the indexing paradox, which states that it if all investors are rational with rational expectations and have a common risk-averse investment performance measure, then no investor can expect to do better than the market. If the cost of indexing is less than the cost of active investing, then all investors would index, which would result with no mechanism to price the possible investments. This paradox relies merely on understanding averages. It does not rely on markets being “informationally efficient,” as demonstrated in a model where different investors have differing degrees of informational advantages and disadvantages.index funds, indexing paradox

Price Indeterminacy Reinvented: Pegging Interest Rates While Targeting Prices, Inflation, or Nominal Income

Contrary to Sargent and Wallace (1975), a central bank’s use of an interest-rate instrument does determine prices when the central bank pursues either a short-term or long-term price target. However, in order for a central bank’s pursuit of a long-term price target to be credible, the public still needs something like a Taylor or McCallum-Woodford rule. The use of an interest-rate instrument also determines prices when the central bank targets nominal income in either the short-term or long-term. However, if the central bank targets interest rates in the short term with a long-term inflation target, then prices are indeterminate.price indeterminancy, pegging interest rates, inflation targeting, nominal-income targeting, nominal-aggregate-demand targeting, price-level targeting

Sounding the Alarm on Inflation Indexing and Strict Inflation Targeting

Unanticipated inflation or deflation causes one party of a nominal contract to gain at the expense of the other party, an effect absent in macroeconomic models with one representative consumer or with consumers having identical consumption. In this paper's general dynamic and stochastic equilibrium model, diverse consumers maximize risk-averse utility and rent labor and land to profit-maximizing firms. Both inflation indexing and strict inflation targeting are Pareto inefficient. When Pareto sharing of changes of aggregate supply is proportional, nominal contracts under perfect nominal income targeting are Pareto efficient, while quasi-real contracts are Pareto efficient regardless.inflation indexing, inflation targeting, quasi-real indexing, nominal income targeting

Logical Pitfalls of Assuming Bounded Solutions to Expectational Difference Equations

The precedent for solving expectational difference equations has been to solve converging equations backwards and diverging equations forward by assuming the solution is bounded. This precedent often leads to incorrect solutions and has less than rigorous foundations. More rigorous procedures would be to determine the terminal condition in a finite model and take the limit of that terminal condition as the horizon goes to infinity. Also, whether one solves forward or backwards depends on the context of the difference equation, not on convergence or divergence. These new procedures reveal Woodford’s (2003) model of a cashless economy to be incomplete.expectational difference equations, infinite horizons, Woodford's cashless economy, price indeterminacy, pegging interest rates

Quasi-Real Indexing-- The Pareto-Efficient Solution to Inflation Indexing

In a pure-exchange economy with one good, stochastic aggregate demand and supply, and consumers having the same relative-risk aversion, Pareto efficiency requires each individual’s consumption to be proportional to aggregate supply. While neither nominal contracts nor pure inflation- indexed contracts provide this proportionality, quasi-real contracts do. Quasi-real contracts adjust for aggregate-demand-caused inflation but not for aggregate-supply-caused inflation, causing their real obligations to be proportional to aggregate supply. When consumers differ in their relative risk aversion, or experience stochastic utility or endowment shocks, they will need insurance and other risk-transfer contracts in addition to quasi-real contracts.inflation indexing, quasi-real indexing

Eclipse-Free-Time Assessment Tool for IRIS

IRIS_EFT is a scientific simulation that can be used to perform an Eclipse-Free- Time (EFT) assessment of IRIS (Infrared Imaging Surveyor) mission orbits. EFT is defined to be those time intervals longer than one day during which the IRIS spacecraft is not in the Earth s shadow. Program IRIS_EFT implements a special perturbation of orbital motion to numerically integrate Cowell's form of the system of differential equations. Shadow conditions are predicted by embedding this integrator within Brent s method for finding the root of a nonlinear equation. The IRIS_EFT software models the effects of the following types of orbit perturbations on the long-term evolution and shadow characteristics of IRIS mission orbits. (1) Non-spherical Earth gravity, (2) Atmospheric drag, (3) Point-mass gravity of the Sun, and (4) Point-mass gravity of the Moon. The objective of this effort was to create an in-house computer program that would perform eclipse-free-time analysis. of candidate IRIS spacecraft mission orbits in an accurate and timely fashion. The software is a suite of Fortran subroutines and data files organized as a "computational" engine that is used to accurately predict the long-term orbit evolution of IRIS mission orbits while searching for Earth shadow conditions

Religion and Inequality: The Role of Status Attainment and Social Balance Processes

Religion is an important determinant of social and economic inequality, but the mechanisms that underlie this relationship are not well-understood. Early scholars recognized this connection, but their ideas do not adequately explain contemporary stratification patterns. Recent research documents robust empirical relationships between religion and material outcomes but has not yet begun to identify causes of these patterns. We fill this gap by providing a theoretical explanation of the religion-inequality link that synthesizes ideas from early and recent sociology. We propose that the process is inherently multilevel. We draw on ideas from status attainment theory to develop a micro-model and ideas from social balance theory to aggregate the model’s outcomes. The synthesis of ideas from these theoretical traditions provides a unique, and potentially useful way to understand the relationship between cultural orientation and material resources

Sustainability in the Business & Marketing Curriculum: : Exploratory Study

Ariadni Kapetanaki, Ross Brennan, and Lynne Eagle, ‘Sustainability in the Business & Marketing Curriculum: Exploratory Study'. Paper presented at the 50th Academy of Marketing Conference, Freedom Through Marketing: Looking Back, Going Forward, 3-6 July 2017, Hull University Business School, Hull, UK.The first sentence of the call for papers for the Academy of Marketing Conference 2017 asserts that marketing is increasingly seen as a force for good, particularly in connection with building awareness of environmental issues and sustainability. In this paper we focus on the education of business students, and particularly marketing students, in issues to do with sustainability. The primary purpose of this paper is to report on an empirical investigation of the beliefs and perceptions of our own students with respect to sustainability. This investigation is planned to be a benchmark study, so that we can track changes in students’ beliefs and perceptions as sustainability issues are further embedded within the curriculum. While environmental sustainability has been a matter of widespread interest and concern for many years, the 2015 Paris Agreement within the United Nations Framework Convention on Climate Change (UNFCCC) can be regarded as the most significant development in recent history. In October 2016 the Paris agreement achieved entry into force, having been ratified by 109 of the 197 Parties to the Convention. The central aim of the Paris Agreement is to strengthen the global response to the threat of climate change; the goal is to restrict global temperature rise to no more than 2 degrees Celsius this century, while making efforts to restrict global temperature rise to no more than 1.5 degrees Celsius (UN, 2015). Given the prominence received by sustainability at the political level, it is not surprising that business schools are being encouraged to include it explicitly within the curriculum. Business school accrediting bodies mandate the inclusion of sustainability in the business curriculum (see appendix for extracts from accrediting body requirements).Peer reviewedFinal Accepted Versio